X  -«• 


FEDERAL  TRADE  COMMISSION 


ENTALS  OF  A  COST  SYSTEM 
FOR  MANUFACTURERS 


JULY  1,  1916 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICE 

1916 


FEDERAL  TRADE  COMMISSION 


FUNDAMENTALS  OF  A  COST  SYSTEM 
FOR  MANUFACTURERS 


JULY  1,  1916 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICE 

1916 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/fundamentalsofcoOOunitiala 


Edward  N.  Hukley, 

Chairman. 
William  J.  Harris, 

Joseph  e.  ^Iwks !"'"'""''''  FEDERAL  TRADE  COMMISSION 

Will  H.  Parry. 

George  Ruulee.  Washixgton 


Leonidas  L.  Bracken, 
Secretary. 

July  1,  1916. 

To  the  American  Manufacturer: 

The  Federal  Trade  Commission  has  found  that  an 
amazing  numloer  of  manufacturers,  particularly  the 
•smaller  ones,  have  no  adequate  system  for  determining 
their  costs  and  price  their  goods  arbitrarily.   It 
is  evident  that  there  must  he  improvement  in  this 
direction  "before  com.petition  can  he  placed  upon  a 
sound  economic  hasis. 

With  the  object  of  aiding  in  the  improvement  of 
"business  generally  we  have  endeavored  in  this  pam.- 
phlet  to  show  briefly  the  importance  of  accurs^te 
manufacturing  costs  and  the  fundamental  princijDD.es 
underlying  them.   I  commend  it  to  your  attention  and 
feel  satisfied  that  if  you  v/ill  read  it  carefully  you 
will  find  many  helpful  suggestions. 

The  pamphlet  has  been  prepared  under  m^^  di- 
rection by  Mr.  Robert  E.  Belt,  Chief  Accountant,  and 
Mr.  R.  ?/.  Gardiner,  Assistant. 

Trusting  we  may  have  your  hearty  cooperation, 
I  am, 

Very  respectfully'"  yours, 


r 


Chairinan, 


CONTENTS. 


rage. 

Pxirpose  of  this  pamplilet 5 

Objections  to  installing  cost  systems 5 

Necessity  for  ascertaining  true  costs 6 

Exchange  of  statistical  information  beneficial 7 

Many  businesses  not  profitable 7 

What  is  cost 7 

System  and  its  development .- 7 

The  job  cost  system 8 

Material 9 

Labor .       9 

Overhead  expense 10 

Departmentalization  necessary  for  proper  distribution  of  factory  overhead 10 

Fixed  factory  charges 11 

Building  expense 11 

Power 12 

Insurance  and  taxes 12 

Depreciation — the  necessity  for  including  in  cost 12 

Methods  of  determining  depreciation 12 

Variable  factory  charges 13 

Interest 14 

Ascertainment  of  normal  cost 14 

Distribution  of  overhead  to  job  costs -. 15 

The  productive-hour  method 16 

Total  factory  cost 16 

Shipping,  selling,  and  general  expenses 17 

Controlling  accounts 18 

The  continuous  production  system 19 

Financial  and  operating  statements 21 

Ledger  accounts  and  statements 21 

Ledger  accounts 21 

Trial  balance 27 

Profit  and  loss  statement 28 

Statement  of  factory  operations 28 

Summary  of  factory  overhead 29 

Balance  sheet 29 

Uses  and  advantages  of  a  cost  system 30 

Better  direction  of  sales  force 30 

Elimination  of  waste 30 

Cost  system  an  investment,  not  an  c::penso 31 

4 


FUNDAMENTALS  OF  A  COST  SYSTEM  FOR  MANUFACTURERS. 


PURPOSE  OF  THIS  PAMPHLET. 

It  is  a  fact  too  littlo  realized  that  an  accurate  determination  of 
costs  is  fundamentally  related  to  manufacturing  efficiency.  More 
and  more  concerns  are  joining  the  ranks  of  those  who  reahze  the 
necessity  of  knowing  accurately  their  costs  of  manufacturing  and 
selling.  Every  busmess  man  who  joins  in  this  work  can  feel  that 
he  is  douig  his  part  toward  the  improvement  of  business  condi- 
tions generally  and  his  own  business  conditions  in  particular.  This 
bulletin  has  been  prepared  with  a  view  to  aiding  the  campaign  of 
education  by  explaining  what  a  cost  system  is,  how  it  operates,  the 
results  obtained,  and  the  benefits  to  be  derived  from  its  operation. 

OBJECTIONS  TO  INSTALLING  COST  SYSTEMS. 

There  are  a  number  of  objections  in  the  minds  of  business  men 
who  have  not  installed  cost  systems  to  taking  the  matter  up.  One 
of  these  is  the  feehng  that  exists  in  the  minds  of  so  many  that  their 
business  is  unique  and  different  from  any  other  and  that  no  system 
could  be  devised  which  would  give  them  true  costs.  It  is  unques- 
tionably true  that  som.e  lines  of  manufacture  lend  themselves  more 
readily  to  the  installation  of  a  cost  system  than  others,  but  it  is  also 
true  that  no  hne  of  manufacture  is  so  comphcated  that  a  system  can 
not  be  devised  which  will  give  reasonably  accurate  results. 

The  most  common  objection  is  that  of  the  cost  of  installation  and 
the  expense  of  operation.  Many  manufacturers  are  of  the  opinion 
that  a  cost  system  means  an  interminable  amount  of  detail  and  red 
tape  and  the  assistance  of  a  number  of  extra  clerks.  It  is  true,  in 
many  cases,  that  some  extra  labor  may  be  required,  but  not  to  the 
extent  that  the  manufacturer  fears.  There  is  in  nearly  every  office 
that  is  not  systematized  sufficient  unnecessary  work  done  to  cut  the 
extra  work  down  to  a  minimum,  and,  in  fact,  in  some  cases,  where 
an  office  has  been  systematized,  it  has  not  been  necessary  to  employ 
any  extra  help  at  all.  If  the  manufacturer  will  look  upon  a  cost 
system  as  an  investment  which  he  expects  to  produce  for  him  a  fair 
return  in  the  same  manner  that  an  investment  in  improved  macliin- 
cry  would,  the  objection  as  to  the  expense  is  not  a  vahd  one.  A 
number  of  business  men  think  that  money  spent  for  stationery  is 
wasted  and  that  a  cheap  ready-made  book  will  answer  as  weU  as 
one  specially  designed  for  his  business.'    If  a  $10  book  which  lasts 

5 


6  COST  SYSTEM   FOR  MANUFACTURERS. 

a  year  will  save  half  an  hour  a  day  for  a  $12-a-week  clerk  as  com- 
pared with  the  use  of  a  ready-made  book  which  can  be  bought  for 
$1,  the  additional  investment  of  $9  has  brought  in  a  revenue  or 
effected  a  saving  of  $39  for  the  year.  This  holds  true  of  nearly  all 
specially  designed  forms  as  well. 

Other  business  men  are  of  the  opinion  that  they  do  not  need  a  cost 
system  because  they  know  what  their  goods  cost.  They  may,  and 
a  number  of  them  do  have  an  approximate  idea  of  what  their  goods 
cost,  but  in  a  large  number  of  instances  this  supposed  knowledge  is 
based  on  foremen's  guesses  in  advance  as  to  the  time  necessary  to 
do  the  work  or  as  to  the  time  spent  on  the  work  after  it  is  done. 
Guesswork  is  unsafe  and  poor  business  practice. 

NECESSITY  FOR  ASCERTAINING  TRUE  COSTS. 

Formerly  the  necessity  for  the  determination  of  true  manufac- 
turing costs  was  not  as  imperative  as  it  is  to-day.  Margins  between 
cost  and  selling  price  in  most  lines  were  larger.  Costs  could  be 
ignored  except  fai  a  general  way  and  a  good  return  stiU  be  made  on 
the  investment;  but  to-day  margins  of  profit  in  most  lines  of  trade 
are  very  much  narrower  than  formerly,  and  the  necessity  for  the 
most  efficient  management  and  closest  analysis  is  felt  as  never 
before. 

It  is  necessary  to-day  for  the  business  man's  success  that  he  know 
on  what  articles  he  is  making  a  profit  and  on  what  he  is  incurring  a 
loss.  Competitive  conditions  are  seriously  disturbed  where  losses 
on  one  or  more  articles  are  recovered  by  profits  on  other  articles. 
It  is  obvious  that  a  manufacturer  should  not  only  know  the  cost  of 
each  article  he  manufactures  but  that  he  should  see  that  every  article 
manufactured  bears  its  proper  share  of  factory  and  general  overhead. 

Most  manufacturing  plants  have  grown  to  a  size  which  renders 
personal  supervision  impossible.  The  only  reliable  way,  therefore,  by 
which  an  executive  can  judge  of  the  efficiency  of  an  oi^ani,zation  is 
through  a  system  of  periodical  statistical  reports.  These  reports 
can  only  be  accurately  obtained  when  a  good  cost  system  is  in 
operation. 

New  methods  are  being  introduced  and  improved  machinery  in- 
stalled in  tlie  factory  every  day,  with  a  view  of  reducing  costs  cither 
by  the  elimination  of  waste  or  by  increasing  efficiency.  It  is  impos- 
sible to  know  whether  the  introduction  of  these  improA^cments  will 
reduce  costs  unless  the  manufacturer  knows  not  only  what  his  total 
cost  is  but  exactly  what  items  make  up  the  total.  Items  of  cost  are 
frequently  lost  track  of  when  the  total  only  is  considered,  while  if 
those  items  were  properly  segregated  so  as  to  show  what  they  were 
they  could  be  materially  rejluced  and  in  some  instances  eliminated 
altogether. 


COST  SYSTEM    FOR   MANUFACTURERS.  7 

EXCHANGE  OF  STATISTICAL  INFORMATION  BENEFICIAL. 

In  tlie  past  many  manufacturers  disliked  to  give  out  information 
concerning  their  business.  To-day  the  reverse  is  the  case.  Trade 
associations  are  compiling  statistics  as  to  production,  shipments, 
and  costs  for  the  benefit  of  their  members,  and  the  manufacturer 
instead  of  trying  to  keep  this  information  to  himself  welcomes  the 
opportunity  to  supply  the  data,  knowing  that  his  competitors  are 
doing  the  same  thing  and  that  these  statistics  will  be  of  benefit  to 
himself  and  to  his  industry.  The  Federal  Trade  Commission  is  keenly 
alive  to  the  value  of  this  infonnation. 

The  Commission  is  urging  manufacturers  to  determine  their  costs 
accurately  in  the  interest  of  better  trade  conditions.  It  believes 
that  anything  that  is  of  benefit  to  an  industry  is  of  benefit  to  the 
public,  and  it  is  also  of  the  opinion  that  the  nearer  cost  systems 
approach  uniformity  the  more  valuable  will  be  the  results. 

MANY  BUSINESSES  NOT  PROFITABLE. 

A  large  proportion  of  manufacturers  are  not  making  the  money 
they  should.     A  great  number  of  them  are  actually  losing  money. 

The  purpose  of  conducting  a  business  is  to  make  money,  and  the 
only  way  to  make  money  is  to  sell  something  for  more  than  it  costs. 
The  first  essential,  then,  is  to  know  the  cost.  It  is  the  belief  of  the 
Commission  that  the  small  margin  of  profit  existing  in  so  many  of  our 
industries  is  due  to  the  ignorance  on  the  part  of  manufacturers  of  what 
their  goods  actually  cost  to  produce.  This  ignorance  causes  them  to 
make  improfitable  prices,  which  the  manufacturer  who  does  know 
his  cost  is  forced  to  meet  to  a  large  extent. 

WHAT  IS  COST? 

Cost  is  defined  as  the  amount  or  equivalent  paid,  or  charged,  or 
given  for  anythmg;  loss  of  any  kmd,  expenditure,  outlay,  as  of 
money,  time,  labor. 

This  equivalent  may  be  in  the  form  of  money  paid  for  material  or 
for  labor,  or  for  some  one  of  the  many  kinds  of  expense  or  loss  that 
exist  in  every  manufacturing  business.  It  is  apparent  that  cost  con- 
sists of  three  elements,  viz,  material,  labor,  and  expense. 

SYSTEM  AND  ITS  DEVELOPMENT. 

Tlie  problem  is  to  ascertain  the  amount  of  each  of  these  elements, 
and  in  order  to  accomplish  this  in  the  simplest  and  most  practical 
manner  the  manufacturer  has  recourse  to  system.  System  is  defined 
as  a  regular  method  or  order,  a  formal  arrangement,  or  a  mode  of 
operation  governed  by  general  laws  or  rules. 


8  COST   SYSTEM    FOR   MANUFACTUEERS. 

During  tlie  last  10  years  the  best  accounting  brains  in  the  country 
have  been  devotmg  a  great  deal  of  time  to  the  perfection  of  general 
laws  or  rules  which  wiU  give  the  desired  results  with  the  least  effort 
and  expense,  and  the  outcome  of  their  work  is  what  is  loiown  as  a 
"Cost  System."  This  provides  not  only  for  the  determmation  of 
the  amount  of  each  element  of  cost  properly  chargeable  to  each  job 
or  operation,  but  also  provides  for  an  improved  method  of  bookkeep- 
ing which  causes  the  books  to  reflect  at  all  times  the  true  financial 
and  industrial  condition  of  the  business  and  renders  possible  the  prepa- 
ration of  montlily  statements  of  conditions,  as  well  as  com^plete 
montlily  statements  of  financial  and  factory  operations. 

There  are,  generally  speaking,  but  two  distinct  methods  of  manu- 
facture. Each  requires  a  cost  system  a  little  different  in  detail  but 
identical  in  fundamental  principles.  The  first  of  these  is  used  in  a 
business  where  every  order  is  a  separate  article  of  manufacture,  very 
often  made  to  order,  and  the  selling  price  fixed  before  work  is  started; 
and  the  second  is  used  in  a  business  w^here  the  output  consists  of  one 
or  more  articles  which  are  being  continually  produced.  For  con- 
venience we  will  designate  the  cost  systems  apphcable  to  each  as  the 
"Job  Cost  System"  and  the  "Continuous  Production  System." 

THE  JOB  COST  SYSTEM. 

Tlie  first  step  is  to  provide  for  giving  the  factory  instructions  as  to 
what  work  is  to  be  done,  and  a  form  should  l)o  provided  which  must 
give  the  following  information :  Job  number,  date,  name  and  address 
of  customer  for  whom  work  is  to  bo  done,  a  description  of  the  work 
to  bo  done,  giving  sufficient  details,  specifications  as  to  what  material 
will  be  needed,  and  shipping  instructions.  This  form  should  also 
have  space  for  the  entry  of  shipments,  so  that  when  the  work  is  done 
the  order  form  will  be  a  complete  record.  A  duphcate  of  this  factory 
order  should  bo  kept  in  the  office  and  wlien  the  original  is  sent  to  the 
factory  the  cost  clerk  opens  a  job  cost  sheet  under  that  number. 

The  job  cost  sheet  should  show  number,  date  opened,  customer's 
name,  and  in  some  cases  a  brief  description  of  the  work  is  advisable, 
as  it  sometimes  enables  the  cost  clerk  to  detect  an  error  in  the  number 
shoA\ni  on  the  time  ticket  or  material  requisition.  As  all  reports  are 
made  by  job  number  instead  of  by  name,  it  is  of  vital  importance 
that  the  greatest  care  bo  taken  to  insure  the  correctness  of  the 
numbers  on  the  time  tickets  and  material  requisitions.  In  addition 
to  the  above  information,  the  cost  sheet  should  be  arranged  so  as  to 
provide  columns  for  the  following:  Date,  employee's  number,  houi-s, 
amount  of  pay,  machine  number,  machine  hours,  rec[uisition  number, 
quantity  of  material  and  cost  thereof. 


COST   SYSTEM    FOR   MANUFACTUREBS.  9 

MATERIAL. 

The  first  element  of  cost  is  material.  Material  is  of  two  kinds, 
direct  and  indirect. 

Direct  material  is  that  which  forms  part  of  some  particular  job 
and  can  be  so  charged.  Indirect  material  is  that  which  can  not  be 
located  as  belonging  to  a  particular  job,  and  which  is  more  in  the 
nature  of  general  supphes.  This  class  of  material  is  sometimes 
termed  "expense  material,"  as  its  ultimate  destination  is  the  expense 
account  of  some  department. 

Material  must  be  purchased,  received,  checked,  and  taken  caro  of 
until  it  is  required  for  use,  and  the  general  method  recommended  is 
as  follows: 

A  part  of  the  factory  should  be  set  aside  as  a  stock  room  and  some 
employee  designated  to  perform  the  duties  of  stock  clerk.  The  stock 
clerk  will  keep  the  stock  ledger  cards  or  sheets,  one  for  each  article, 
showing  the  quantity  on  hand.  These  cards  should  also  show  the 
maximum  quantity  of  each  article  he  is  to  be  allowed  to  carry  and 
also  the  minimum  below  which  the  stock  must  not  be  allowed  to 
fall.  When  the  stock  reaches  the  minimum  a  requisition  should  be 
made  on  the  purchasing  agent  for  sufficient  cjuantity  to  bring  the 
stock  up  to  the  maximum  and  sent  to  the  superintendent  or  works 
manager  for  approval,  after  which  the  goods  are  ordered.  When 
the  goods  come  in  they  should  go  to  the  receiving  clerk,  who  checks 
them,  reports  their  receipt  to  the  office,  and  delivers  the  goods  to  the 
stock  room,  where  they  remain  until  requisitioned  out. 

When  the  order  reaches  the  factory  the  first  step  is  to  obtain  the 
material,  and  a  requisition  should  be  made  on  the  storeroom  for  the 
necessary  quantity.  This  requisition  should  be  numbered  and  space 
should  be  provided  thereon  for  job  number  or  department,  date, 
quantity,  description,  price,  amount,  and  signature  of  foreman.  The 
cost  clerk  extends  the  amount  on  the  requisition  and  posts  it  to  the 
job  cost  sheet  in  the  space  provided,  then  files  it  away  until  the  end 
of  the  month,  when  the  total  for  the  month  must  be  obtained. 

LABOR. 

The  second  element  of  cost  is  labor,  and  this,  like  material,  is 
divided  into  two  classes — direct,  or,  as  it  is  sometimes  called,  pro- 
ductive labor,  and  indirect,  or  nonproductive  labor.  Direct  labor  is 
that  which  is  applied  directly  to  the  job  and  which  can  be  so  charged. 
Indirect  labor  is  that  which  can  not  be  located  as  belonging  to  any 
particular  job,  but  must  be  charged  to  the  expenses  of  some  depart- 
ment. 

The  general  method  of  handling  labor  is  to  have  each  employee 
make  up  a  time  ticket  each  day.  This  ticket,  for  recording  direct 
labor,  should  show  the  employee's  name,  employee's  number,  date 

39743°— 16 2 


10  COST   SYSTEM   FOE   MANUFACTURERS. 

and  hours  worked  on  each  job,  job  number,  and  machine  number, 
if  a  machine  is  used ;  and  m  the  case  of  indii'ect  labor  the  department 
and  nature  of  the  work  must  be  shown  in  lieu  of  job  nmnber.  These 
time  tickets  are  sent  in  to  the  office  each  day  and  the  direct  labor  is 
posted  to  the  job  cost  sheets  and  the  indu'ect  labor  entered  on  a 
sunmiary  sheet  with  columns  headed  by  the  name  of  departments, 
so  that  the  totals  can  be  posted  to  the  department  expense  accoimt  at 
the  end  of  the  month. 

The  productive  hours  for  each  department  are  entered  on  another 
summar^^,  both  for  man  hours  and  machine  hours,  which  is  totaled 
at  the  end  of  the  month.  If  the  work  is  correctly  done  the  totals  on 
this  summary  will  equal  the  total  of  the  postings  made  to  the  job 
cost  sheets. 

OVERHEAD  EXPENSE. 

The  job  cost  sheet  now  has  entered  thereon  the  first  two  elements 
of  cost,  viz,  direct  material  and  direct  labor,  and  the  next  question 
is  the  proper  method  of  handling  the  third  element  of  cost,  which  is 
generally  kno-vm  as  "Overhead  Expense,"  or,  as  it  is  also  called, 
' '  Burden.' '  Overhead  expense  is  the  expense  of  every  kind  connected 
with  the  business,  none  of  which  can  be  directly  located  as  belonging 
to  a  particular  job.  These  expenses,  while  part  of  the  cost  of  a  job, 
are  general,  so  can  not  reach  the  job  direct;  hence  a  method  must  be 
devised  for  them  to  reach  the  cost  she^t  in  an  indirect  manner,  the 
method  at  the  same  time  being  so  planned  that  each  job  will  receive 
its  fair  proportion  of  the  total. 

Before  taking  up  the  question  of  how  overhead  expense  is  to  be 
handled,  it  is  necessaiy  to  determine  just  what  items  constitute 
overhead.  A  list  of  these  items  and  their  description  must  neces- 
sarily be  very  general  and  subject  to  change,  as  items  of  expense 
occur  in  some  lines  of  manufacture  which  it  is  necessary  to  treat  as 
overhead,  while  the  same  items  in  another  line  can  be  handled  as 
direct  expense. 

Overhead  may  properly  be  divided  into  two  classes — factory  over- 
head, which  consists  of  items  directly  belonging  to  factory  operations, 
and  general  overhead,  which  is  expense  not  directly  comiectcd  with 
the  factory. 

As  factory  overhead  is  one  of  the  items  of  total  factory  cost,  the 
method  of  handling  this  will  be  outhned  first. 

DEPARTMENTALIZATION  NECESSARY  FOR  PROPER  DISTRIBUTION  OF 

FACTORY  OVERHEAD. 

The  first  step  in  a  fair  and  equable  distribution  of  factory  overhead 
is  a  departmentahzation  of  the  business.  Every  business  can  bo 
departmentalized  to  some  extent,  some  more  than  others,  but  the 
subdivision  into  departments  varies  so  much  in  the  dift'erent  lines  that 
it  is  almost  impossible  to  give  any  definite  idea  as  to  what  divisions 


COST  SYSTEM    FOR  MANUFACTURERS.  11 

should  be  made.  Generally  speaking,  it  is  best  to  subdivide  into 
departments  according  to  operations  of  manufacture,  although  at 
times,  for  simpHcity,  a  subdivision  which  places  similar  work  in  the 
same  department  regardless  of  operation  is  used  and  has  proven 
satisfactory  in  a  number  of  cases.  By  similar  work  is  meant 
hand  workers  who  use  practically  the  same  amount  of  supphes, 
machines  of  similar  type,  etc.  Departmentalizing  by  operations  is 
a  Httle  more  complicated,  as  it  results  in  a  greater  number  of  depart- 
ments, because  the  same  or  a  similar  kind  of  hand  work  may  be  done 
in  several  departments,  and  the  same  holds  true  of  the  machine 
departments. 

In  a  number  of  lines  of  manufacture  all  work  can  be  placed  in  one 
department  where  the  unit  of  production  is  the  same;  i.  e.,  with  hand 
workers  the  unit  is  the  productive  man  hour,  with  machine  workers 
the  machine  hour,  and  in  other  departments  the  unit  may  be  pound, 
ton,  piece,  dozen,  square  feet,  yard,  etc.  In  departmentaUzing  a 
business  the  fact  should  be  borne  in  mind  that  the  better  the  depart- 
mental subdivision  is  made  the  more  accurate  will  be  the  cost  results. 

FIXED  FACTORY  CHARGES. 

Building  Expense,  Power,  Insurance,  Taxes,  and  Depreciation  con- 
stitute what  are  generally  known  as  "Fixed  Factory  Charges,"  be- 
cause they  are  practically  fixed,  and  the  factory  has  nothmg  to  do 
with  either  increasing  or  decreasing  them. 

BUILDING  EXPENSE. 

The  first  requisite  of  a  business  is  a  place  in  which  to  work;  conse- 
quently the  first  item  of  overhead  is  Buildmg  Expense  or  Rent.  If 
the  building  is  owned  by  the  manufacturer,  the  building  expenses 
consist  of  Insurance,  Taxes,  Depreciation,  and  Repairs,  together  with 
such  other  expenses  which  are  general  in  their  nature  but  yet  are 
necessary  to  render  the  building  useful,  such  as  heat,  light,  elevator, 
janitor,  and  water.  If  the  building  is  rented,  the  items  of  msurance, 
taxes,  depreciation,  and  repairs  are  paid  by  the  owner  and  in  lieu  of 
these  is  Rent.  Rent  includes  a  return  on  the  investment  in  addition 
to  the  items  named,  so  when  it  is  desired  to  make  comparisons  be- 
tween plants  where  the  building  is  owned  and  where  it  is  rented  the 
return  on  the  investment  must  be  taken  into  consideration. 

The  basis  of  distribution  for  aU  rent  charges  is  tlie  productive  or 
used  square  feet.  Tlie  total  used  square  feet  divided  into  the  total 
rent  charges  gives  the  charge  per  used  square  foot.  Tliis  result 
multiplied  by  the  used  area  of  the  department  gives  that  depart- 
ment's proportion  of  the  total  rent  expenses.  By  used  floor  space  is 
meant  that  which  is  actually  in  use,  exclusive  of  stairways,  passages, 
elevator  space,  and  idle  or  unused  sjjace. 


12  COST   SYSTEM   FOR  MANUFACTURERS. 

POWER. 

The  second  requisite  is  power,  and  this  must  be  obtained  either 
from  outside  sources  or  generated  in  one's  own  plant.  The  distribu- 
tion of  power  is  a  httle  more  difficult  than  that  of  building  expense, 
and  sometimes  an  arbitrary  division  based  on  the  opinion  of  the 
engineer  and  superintendent  is  used,  but  this  method  is  not  recom- 
mended. One  difficulty  in  distributing  power  charges  is  that  very 
often  the  same  boUer  supplies  steam  for  heating  and  steam  for  power 
generating  and  it  is  difficult  to  say  how  much  for  each. 

For  distributing  power  charges  the  factor  generally  used  is  found 
by  multiplying  the  horsepower  required  by  each  machine  or  depart- 
ment by  the  average  hours  run  by  each  and  dividing  the  sum  into  the 
total  power  charge.  Power  distribution  is  a  problem  in  itself,  and 
it  varies  so  much  in  different  plants  that  it  is  impossible  to  lay  down 
any  rules  for  its  solution.  Each  plant  must  be  treated  in  an  indi- 
vidual manner  according  to  the  existing  conditions. 

INSURANCE  AND  TAXES. 

Insurance  and  taxes  should  be  distributed  on  the  basis  of  the 
actual  net  value  of  the  equipment  in  each  department.  This  refers 
to  fire  insurance  and  taxes  on  the  plant  only,  as  boiler  insurance  is  a 
charge  to  poWer,  accident  insurance  is  a  charge  to  general  factory 
expense,  and  the  chaise  for  other  forms  of  insurance  is  determined 
by  the  nature  of  the  insurance.  Taxes  on  real  estate  and  plant  only 
are  chargeable  against  manufacturing  operations,  as  taxes  on  finished 
goods  in  stock  and  franchise  taxes  are  chargeable  to  general  expense, 
while  income  tax  is  a  direct  charge  to  profit  and  loss. 

DEPRECIATION— THE  NECESSITY  OF  INCLUDING  IN  COST. 

Depreciation  is  one  of  the  most  important  of  all  the  overhead 
expenses,  because  it  is  generally  the  lai^est.  There  has  probably 
been  more  written  on  this  subject  than  any  other  item  of  overhead, 
but  there  are  so  many  different  ways  of  handling  depreciation,  some  of 
which  are  best  adapted  for  one  line  and  some  for  another,  that  there 
is  really  no  recognized  standard  method.  It  is  universally  admitted, 
however,  that  depreciation  does  exist,  that  it  is  an  element  of  cost 
just  as  much  as  labor  or  material,  and  that  any  sj'stem  which  does 
not  provide  for  including  it  is  faulty  and  one  that  wiU  not  give 
true  costs. 

METHODS  OF  DETERMINING  DEPRECIATION. 

One  method  of  handling  depreciation,  which  is  unqualifiedly  con- 
demned although  extensively  used,  is  to  wait  until  the  end  of  the 
year  and  then  if  the  profit  and  loss  statement  shows  that  a  good 
profit  has  been  earned  to  charge  a  part  of  this  profit  to  depreciation. 
If,  on  the  other  hand,  the  profit  and  loss  statement  shows  little  or 
no   profit,  nothing  is   charged   to   depreciation.     It  is  difficult  to 


COST  SYSTEM   FOR  MANUFACTURERS.  13 

understand  how  any  practical  man  can  take  the  view  that  his  plant 
and  equipment  have  not  worn  out  because  he  has  not  made  a  profit, 
and  at  the  same  time  have  worn  out  when  he  has  made  a  profit. 

The  first  step  necessary  to  provide  for  proper  depreciation  is  to  de- 
partmentalize the  plant  values.  The  next  step  is  to  take  each  kind 
of  equipment  or  machine  and  figure  its  proper  depreciation. 

There  are  several  methods  of  determining  the  amount  of  deprecia- 
tion. One  is  to  estimate  the  scrap  value  and  deduct  this  figure  from 
the  original  cost.  The  difference  is  then  divided  by  the  estimated 
life  of  the  machine  in  years,  and  the  result  is  the  annual  depreciation 
on  that  machine.  A  modification  of  this  method  which  is  not  quite 
as  simple,  but  really  affords  no  difficulty,  is  after  ascertaining  the 
amount  to  be  charged  off  during  the  life  of  the  machine  to  determine 
a  percentage  which  when  applied  to  the  net  book  value  of  the  machine 
will  leave  only  the  scrap  value  of  the  machine  on  the  books  at  the  ex- 
piration of  its  estimated  life. 

To  illustrate:  If  the  initial  cost  of  a  machine  and  equipment  is- 
$1,000  and  the  estimated  scrap  value  is  $200,  with  an  estimated  life 
of  10  years,  then  $800  is  the  amount  that  must  be  charged  into  cost 
during  that  period,  or  $80  per  year.  To  attain  this  result,  by  using 
the  net  value  of  the  machine  as  a  basis,  a  rate  of  15  per  cent  would 
be  necessary,  which  would  make  the  depreciation  15  per  cent  on  $1,000, 
or  $150,  the  first  year;  15  per  cent  on  $850,  or  $127.50,  the  second  year, 
etc.  The  advantage  of  this  method  in  the  interest  of  normal  costs  is 
that  the  decrease  in  depreciation  charges  is  ordinarily  offset  by  an 
increase  in  repairs. 

VARIABLE  FACTORY  CHARGES. 

Variable  charges  or  controllable  expenses  are  the  final  items  of 
factory  overhead.  These  are  subdivided  departmentally  and  charged 
to  the  expense  account  of  each  department.  Owing  to  the  fact  that  no 
two  lines  of  manufacture  have  the  same  kinds  of  expenses,  a  descrip- 
tion of  them  must  be  very  general.  Such  items  as  nonproductive 
labor,  repans,  lubricating  oils,  and  miscellaneous  supplies  are  found 
in  nearly  all  expense  accounts. 

Factory  expenses  are  incurred  which  can  not  be  located  as  belong- 
ing to  any  department,  and  these  items  should  be  charged  to  an  ac- 
count called  ''General  Factory  Expense."  This  account  should  be 
distributed  over  the  departmental  expense  accounts  on  some  basis 
which  is  fan*  to  all,  the  natiu-e  of  this  distribution  varying  as  to 
special  conditions  existing  in  each  particular  business.  Great  care 
should  be  taken  to  prevent  anything  being  charged  to  the  general 
account  that  could  possibly  be  charged  to  one  of  the  departmental 
accounts,  as  otherwise,  either  through  carelessness  or  lack  of  knowledge, 
the  general  account  will  become  the  dumping  ground  for  all  items 
the  charge  for  which  is  in  the  least  doubt. 


14  COST   SYSTEM   FOR  MANUFACTUREES. 

INTEREST. 

Tlie  question  of  whether  interest  on  the  capital  invested  is  a  proper 
charge  against  cost  of  production  is  one  on  which  there  is  a  marked 
difference  of  opinion.  The  cases  where  it  is  considered  desirable  to 
include  interest  in  cost  may  be  grouped  under  two  heads: 

1.  Wlicre  materials  have  to  be  stored  for  long  periods  while  a 
seasoning  process  is  being  completed. 

2.  Where  it  is  desired  to  show  the  effect  of  variations  in  the  amount 
of  capital  employed  and  the  term  of  employment. 

As  seasoned  material  has  a  higher  value  than  when  first  purchased, 
it  is  apparent  that  the  interest  on  the  capital  locked  up  during  the 
seasoning  foirms  in  a  sense  a  direct  part  of  the  cost  of  the  material. 
If  the  material  were  purchased  in  a  seasoned  condition,  a  higher 
price  would  have  to  be  paid,  and  this  price  would  at  least  include 
interest  and  other  carrying  charges. 

As  some  manufacturing  processes  require  the  use  of  expensive 
equipment  or  take  a  long  time  to  complete,  both  of  which  tie  up 
capital,  while  other  processes  require  neither  the  equipment  nor  the 
time,  it  is  impossible  to  get  true  relative  costs  unless  consideration  is 
given  to  interest  on  the  capital  employed. 

Cost  accountants  and  industrial  engineers,  for  comparative  and 
statistical  purposes,  almost  unanimously  advocate  including  interest 
in  cost,  and  so  far  as  interest  is  included  in  cost  for  comparative  or 
statistical  purposes  it  serves  a  useful  purpose. 

Auditors,  on  the  other  hand,  who  are  more  directly  interested  in 
the  preparation  of  statements  showing  the  financial  condition  of  a 
business,  take  the  ground  that  interest  is  not  an  item  of  cost  and 
that  to  include  it  in  cost  results  in  an  inflation  of  inventory  values 
and  an  anticipation  of  profits.  It  is  true  that  including  interest 
in  cost  does  inflate  the  inventory  and  is  an  anticipation  of  profit  by 
exactly  the  amount  of  interest  charged  to  the  cost  of  the  goods  on 
hand.  In  arriving  at  inventory  values,  however,  the  approxhnate 
interest  which  has  been  charged  to  the  cost  of  the  goods  on  hand 
can  be  readily  eUminated. 

It  is  recommended  that  where  interest  on  the  investment  is  treated 
as  an  item  of  cost  that  the  interest  charged  to  the  goods  on  hand  be 
eliminated  from  inventory  values,  and,  that  in  preparing  profit  and 
loss  statements  the  amomit  of  the  interest  charged  to  costs  duiing 
the  period  be  returned  to  Income  under  the  specific  caption  "Interest 
on  Investment." 

ASCERTAINMENT  OF  NORMAL  COST. 

In  every  manufacturing  business  it  is  unquestionably  true  that  in 
some  montlis  items  of  expense  wiU  occur  which  are  not  properly 
chargeable  against  the  cost  for  that  month.     For  instance,  it  may  be 


COST   SYSTEM   FOR   MANUFACTURERS.  15 

found  nocossary  to  make  extensive  repairs  on  a  machine,  wliich 
repairs  are  sufficient  for  the  entire  year,  and  it  would  be  manifestly 
unfair  to  include  the  entire  repairs  in  the  costs  of  any  given  month. 
Furthermore,  every  business  has  its  dull  season  when  its  departments 
are  not  running  more  than  half  time,  and  this  would  also  result  in  the 
actual  cost  for  those  months  being  abnormally  high. 

Tiiese  facts  load  to  the  conclusion  tliat  what  is  necessary  for  the 
manufacturer  to  know  is  not  "What  did  it  cost  me  to  produce  my 
goods  last  month?"  but  "What  would  it  have  cost  me  to  produce 
under  normal  conditions  and  how  far  were  my  actual  costs  from 
normal?"  It  will  be  seen  that  if  selling  prices  are  based  on  actual 
costs  during  a  busy  season  when  the  plant  is  probably  working  over- 
time, the  selling  prices  would  be  so  low  that  the  plant  might  bo  liter- 
ally swamped  with  work,  while  conversely,  if  the  selling  prices  were 
based  on  actual  costs  when  the  plant  was  dull,  they  might  be  so  high 
that  no  business  whatever  could  be  obtained.  It  is  necessary,  there- 
fore, that  costs  be  averaged  over  a  period  of  time  sufficiently  long  to 
take  in  both  dull  and  busy  seasons.  Tlie  method  of  doing  this  is  to 
estabhsh  a  "Reserve  for  Overhead"  and  credit  this  account  with  the 
reduction  in  cost  during  the  busy  season  and  charge  it  with  the 
increase  in  cost  during  the  dull  season.  Tlie  balance  of  this  account 
is  closed  out  to  Trading  Account,  as  will  be  explained  later. 

DISTRIBUTION  OF  OVERHEAD  TO  JOB  COSTS. 

Having  now  provided  for  the  recording  of  the  overhead  expense,  it 
becomes  necessary  to  provide  for  charging  it  to  the  different  jobs. 
There  are  several  methods  of  doing  this.  The  first  is  by  charging  a 
percentage  on  direct  labor,  but  this  in  many  lines  results  in  inaccu- 
racies and  the  method  has  been  discarded  by  a  large  number  of 
manufacturers,  although  there  are  many  who  still  use  it  owing  to 
its  ease  of  operation.  An  illustration  will  show  the  reason  for  the 
inaccuracy  of  this  method.  One  man  receiving  40  cents  an  hour 
may  be  doing  handwork,  requiring  no  power,  very  little  floor  space, 
and  few  supplies.  If  the  overhead  rate  was  40  per  cent,  his  hour 
cost  woidd  be  40  plus  16,  or  56  cents.  Another  man,  receiving  the 
same  rate  of  pay,  may  be  working  at  a  largo  and  expensive  machmo, 
bemg  subject  to  repairs,  using  power,  several  times  the  floor  space, 
and  using  a  quantity  of  supphes,  and  his  cost  would  be  figured  at 
56  cents  also,  although  it  is  probably  a  fact  that  the  machine  he  is 
using  can  not  be  operated  for  less  than  $1  an  hour.  Another  fault 
with  this  method  is  that  it  throws  most  of  the  burden  on  the  high- 
priced  man,  when  as  a  matter  of  fact,  and  this  will  be  admitted  by 
nearly  every  practical  executive,  the  high-priced  man  requires  less 
supervision  and  wastes  less  material  than  the  cheaper  one  and  really 
should  carry  a  less  burden  instead  of  a  greater. 


16 


COST   SYSTEM   FOB   MANUFACTURERS. 


There  are,  however,  some  lines  of  manufacture  where  the  direct 
labor  method  of  distributing  overhead  can  be  used  to  advantage, 
particularly  where  the  workmen  are  on  a  piecework  basis  or  where 
they  receive  practically  the  same  wage.  In  such  cases  a  percentage 
of  direct  labor  will  give  good  results. 

THE  PRODUCTIVE-HOUR  METHOD. 

Another  method,  and  the  one  that  is  recognized  by  a  majority  of 
manufacturers  and  accountants  as  the  standard,  is  what  is  known 
as  the  "Productive-Hour  Method."  In  a  plant  where  practically 
all  the  labor  is  hand  labor,  the  man  hour  is  the  basis  and  the  total 
hours  divided  into  the  total  overhead  expense  gives  a  rate  per  hour, 
which  rate  multiplied  by  the  hours  spent  on  a  job  gives  the  over- 
head expense  chargeable  to  that  job. 

In  a  plant  where  machines  are  the  producing  unit  the  distribution 
must  be  on  the  basis  of  the  machine  hour,  and  the  same  method  is 
pursued  as  in  the  case  of  the  man  hour. 

An  estimate  of  overhead  expenses  should  be  made  at  the  beginning 
of  the  year,  based  on  previous  years'  experience  with  such  changes  as 
the  executive's  knowledge  of  business  conditions  leads  him  to  make. 
Tliis  figure,  divided  by  the  expected  output  in  hours  of  the  machines, 
gives  a  normal  overhead  expense  rate  to  be  applied  to  all  work  in 
that  department.  This  rate  remains  constant  until  the  end  of  the 
fiscal  year.  The  following  schedule  shows  the  method  to  be  used  in 
establishing  this  rate: 

ESTIMATED  FACTORY  OVERHEAD,  1916. 


Indirect  Labor 

Building  Expense 

Power 

Insurance 

Taxes 

Depreciation 

Repairs 

General  Factory  Expense. 

Miscellaneous  Supplies 

Miscellaneous  Expense 


Total. 

Dept.  A. 

87,300 

00 

$2,500 

00 

3,900 

00 

.1,200 

00 

8,560 

00 

2,800 

00 

420 

00 

144 

(K» 

525 

00 

ISO 

00 

2,625 

00 

900 

00  ' 

5,400 

00 

1,500 

00 

4,950 

00 

i,a50 

00 

790 

(K) 

240 

00 

1,818 

00 

720 

00 

36,288 

00 

11,834 

00 

1 

Dept.  B. 


$3,000 

1,500 

3,960 

192 

240 

1,200 

2,700 

2,100 

360 

900 


16, 152 


Dept.  C. 


$1,800 

1,200 

1,800 

84 

105 

525 

1,200 

1,200 

190 

19S 


8,302     00 


Yearly  Hours  Per  Unit: 
3C)6  Days  8  Hours  Each . 
Less  10  per  cent . . . . 


Net  Yearly  Hours  Per  Unit . 
Number  of  Units  in  Department . . 

Yearly  Hours  per  Department 

Hourly  Overhead  Rate 


2,448 
245 


2,448    , 
245    I 


2,203 

8 

17,624 

67$ 


2,203 

14 

30,842 

62t 


2,448 
245 


2,203 

25 

55,075 

15< 


TOTAL  FACTORY  COST. 


The  job  cost  sheet  has  now  been  charged  with  the  three  elements 
of  cost,  viz,  material,  labor,  and  factory  overhead  expense,  and  the 
total  of  these  constitutes  factory  cost,  to  which  must  be  added  the 
general  overhead. 


COST   SYSTEM   FOR   MANUFACTUREES. 


17 


SHIPPING,  SELLING,  AND  GENERAL  EXPENSES. 

All  of  the  items  of  factory  cost  now  having  been  described  and  the 
goods  completed  and  placed  in  the  storeroom  as  finished  goods,  the 
next  step  is  the  method  of  handling  the  shipping,  selling,  and  general 
expenses  of  the  business. 

Shipping  account  is  charged  each  month  with  its  proportion  of  the 
fixed  charges  and  with  labor,  supplies,  and  miscellaneous  expense 
items.     The  total  of  this  account  is  closed  out  to  Profit  and  Loss. 

Selling  expense  is,  the  next  item  to  be  considered.  Some  include 
everything  under  this  head  that  is  not  charged  to  the  factory.  A 
better  plan,  though,  is  to  separate  the  actual  selling  expense  from  the 
general  expenses  and  include  in  selling  only  such  items  as  salaries  and 
expenses  of  the  sales  force  whether  on  the  road  or  in  the  office,  adver- 
tising, catalogues,  price  lists,  the  cost  of  handling  canceled  orders,  etc. 

Under  general  expenses  are  included  officers'  salaries,  office  expenses 
(not  including  factory  clerks),  discount  on  sales,  bad  debts,  bad 
work,  franchise  taxes,  and  other  items  of  a  general  nature.  The 
item  Bad  Work  included  in  General  Expense  is  defective  work.  As 
every  manufacturer  has  to  contend  with  this  item  of  expense  it  must 
be  included  with  the  other  general  expenses. 

An  estimate  of  shipping,  selling,  and  general  expenses  should  be 
made  at  the  beginning  of  the  year.  This  amount  divided  by  the 
estimated  cost  of  the  total  completed  work  for  the  year  gives  a  per- 
centage for  these  items.  Applying  this  rate  to  the  factor}'-  cost  of  a 
job,  the  amount  which  must  be  added  to  factory  cost  to  ascertain 
total  cost  is  readily  determined. 

The  following  schedule  shows  the  method  of  arriving  at  this  rate: 

ESTIMATED  SHIPPING.  SELLING,  AND  GENERAL  EXPENSES. 


FOR  YEAR  1916. 


Building  Expense 

Labor 

Salaries 

Oflicers'  Salaries 

Commissions 

Advertising 

Insurance 

Taxes 

Depreciation 

Repairs 

Delivery  Expense 

D  iscourit  on  Sales 

Reserve  for  Bad  Debt  s 

Mi:>cellaneous  Expense 

Estimated  cost  of  completed  work, 

$120,000.00. 
Percentage  on  Cost 


Total. 

i 

$1,200 

00  ; 

1,500 

(K) 

1      13, 200 

00 

i        4,800 

00 

2,500 

00  . 

'        1,,500 

00 

i            192 

00  i 

;          215 

00  ' 

1            200 

(K) 

120 

00 

2,300 

00 

1,200 

(H)  1 

j            750 

(K)  '■ 

1            325 

00 

30,002 

00  1 

' 

Distribution. 


Shipping,     j       Selling. 


$600 
1,500 


12 
15 
100 
50 


5     00 


2,352     00 


2':c 


$9,000 


2,500 
1,500 


00 


General. 


$600     00 


3.600 
4,800 


180 

00 

200 

00 

100 

00 

70 

00 

2,300 

o:) 

1,200 

00 

7.50 

c:) 

150 

C) 

ll.oTo 


18  COST   SYSTEM   FOE   MANUFACTURERS. 

CONTROLLING  ACCOUNTS. 

The  principles  of  double  entry  are  carried  out  in  connection  with 
a  cost  system  by  means  of  what  is  known  as  "controlling  accounts." 
The  advantage  of  the  controlling  principle  is  that  it  puts  the  book- 
keeper in  position  to  check  up  the  work  of  the  cost  department  in 
totals,  or,  in  other  words,  to  control  it.  The  control  system  will  not 
detect  an  error  such  as  posting  to  the  wrong  account,  but  it  is  an 
indubitable  proof  that  the  cost  clerk  has  posted  every  item  to  the 
proper  side  of  some  account.  It  is  hard  to  exaggerate  the  importance 
of  this  feature  in  any  cost  system. 

Materials  account  is  charged  with  all  purchases  of  materials  from 
the  accounts  payable  or  voucher  register.  Tlie  requisitions  for  the 
month  are  totaled  and  a  journal  entry  effected  crediting  Materials 
and  charging  Work  in  Process.  The  balance  of  the  account  is  the 
cost  of  the  materials  in  the  stock  room. 

Labor  account  is  charged  with  the  total  labor,  both  direct  and 
indirect.  At  the  end  of  the  month  the  account  is  credited  with  the 
total  labor  shown  on  the  cost  clerk's  labor  summaries  and  Work  in 
Process  charged  with  the  direct  labor  and  the  departmental  expense 
accounts  ^^dth  the  indirect  labor.  There  will  be  a  credit  balance  in 
this  account  which  will  represent  the  amount  earned  by  the  employees, 
but  not  paid.  When  the  end  of  a  pay  period  falls  on  the  last  day  of 
the  month,  the  account  should  balance. 

The  next  type  of  controlling  accounts  necessary  are  those  which 
reflect  the  overhead  expenses.  Building  Expense  account  is  charged 
with  all  expenses  of  every  kind,  as  heretofore -described,  and  at  the 
end  of  the  month  a  journal  entry  is  made  charging  each  department 
with  its  proportion  of  the  total  and  crediting  Building  Expense 
account.  The  entire  expense  of  this  account  should  be  absorbed  by 
the  departmental  expense  accounts. 

Power  account  is  handled  in  exactly  the  same  manner.  The  entire 
expense  of  this  account  should  also  be  absorbed  by  the  departmental 
expense  accounts. 

Insurance  is  charged  with  all  insurance  which  applies  to  the  factory, 
such  as  fire,  accident,  boiler,  etc.  This  account  is  credited  each 
month  with  one-tweKth  of  the  amiual  payment  and  the  proper 
departmental  account  charged.  Insurance  on  stock,  either  raw 
material,  work  in  process,  or  finished  goods,  is  charged  to  General 
Expense  and  Insurance  account  credited.  The  balance  of  tliis 
account  is  the  value  of  prepaid  insurance. 

Taxes  account  is  handled  in  the  same  manner  as  the  Insurance 
account,  but  these  two  accounts  should  be  kept  separate. 

Depreciation  account  is  comparatively  simple  to  handle,  A  journal 
entry  is  made  each  month  charging  Builduig  Expense,  Power,  and 
the  departmental  expense  accounts  with  the  amount  of  depreciation 


COST  SYSTEM  FOE  MANUFACTURERS.  19 

decided  on  at  the  beginning  of  the  year.  The  credit  goes  to  an  account 
called  "Depreciation  Reserve,"  the  effect  of  which  is  to  reduce  the 
book  value  of  the  plant  and  equipment,  although  it  is  not  a  good 
plan  to  actually  reduce  this  value  on  the  books.  It  is  better  to  carry 
the  reserve  account  and  let  the  plant  accounts  remain  at  the  original 
cost  figure. 

The  departmental  expense  accounts  have  now  been  charged  with 
their  proportion  of  the  fixed  charges  and  with  the  indirect  labor.  The 
only  other  charges  are  miscellaneous  expenses,  supplies,  and  repairs, 
and  these  come  from  the  Accounts  Payable  Register.  These  depart- 
mental expense  accounts  are  now  credited  with  the  distributed  over- 
head expense  determined  by  multiplying  the  number  of  operating 
hours  by  the  normal  hourly  rate,  Work  in  Process  account  being 
charged.  This  total  credit  should  balance  the  expense  accounts,  but 
practically  there  will  be  small  balances  which  should  be  charged  or 
credited  at  the  end  of  the  year  to  Reserve  for  Overhead. 

Work  in  Process  account  now  stands  charged  with  direct  material, 
direct  labor,  and  the  departmental  overhead  expense.  It  is  credited 
with  the  cost  of  aU  jobs  completed  during  the  month,  the  charge 
being  to  Finished  Goods  account.  The  balance  of  Work  in  Process 
account  is  the  factory  cost  of  mcomplete  work.  The  charge  to  offset 
this  credit  is  to  Finished  Goods  account. 

When  goods  are  sold.  Finished  Goods  account  is  credited  with  the 
cost  and  Trading  Account  charged.  This  figure  is  what  is  known  as 
''Cost  of  Sales."  When  goods  are  returned,  Trading  accoimt  is 
credited  and  Finished  Goods  charged  with  the  cost  of  the  returned 
goods,  so  that  Cost  of  Sales  will  only  be  the  cost  of  goods  actually 
sold. 

The  Reserve  for  Overhead  is  charged  or  credited  to  Trading  ac- 
coimt,  so  that  the  balance  of  the  account  is  the  true  gross  profit 
on  the  goods  sold. 

THE  CONTINUOUS  PRODUCTION  SYSTEM. 

A  system  for  recording  the  costs  of  a  continuous  product  is  a  much 
simpler  one  than  a  system  for  recording  the  cost  of  job  work,  because 
in  the  former  costs  are  figured  department  aUy  or  by  processes 
instead  of  by  jobs.  The  accounts  are  practically^  the  same,  except 
that  there  is  not  the  necessity  for  the  same  detailed  analysis  as  ui  the 
job  cost  system. 

The  business  must  be  dcpartmentahzed  as  the  first  step,  and  the 
departmental  divisions  carefully  observed,  as  otherwise  true  costs 
will  not  be  obtained.  The  departmental  divisions  are  different  from 
the  job  cost  divisions,  as  these  should  be  by  processes,  regardless  as 
to  whether  the  work  is  of  similar  character  or  not. 

Material  is  handled  in  the  same  way  in  both  systems  as  far  as 
purchases  and  delivery  to  stock  room  goes,  but  m  a  slightly  different 


20  COST   SYSTEM   FOR   MANUFACTURERS. 

manner  after  it  is  requisitioned  out.  It  will  be  necessary  to  open  a 
material  account  for  each  department.  As  the  material  is  withdrawn 
for  use  these  accounts  are  charged  with  its  cost  whether  it  be  pur- 
chased raw  material  or  the  finished  product  of  some  preceding  depart- 
ment. The  credit  to  these  accounts  will  be  the  cost- of  the  material 
used  on  the  completed  work  and  the  balance  will  be  the  cost  of  the 
material  used  on  the  work  in  process. 

Labor  is  handled  in  the  same  manner  as  described  in  the  Job 
Cost  System,  except  that  it  is  not  necessary  to  differentiate  between 
direct  and  mdirect  labor.  It  is,  however,  advisable  to  keep  the 
direct  and  indirect  labor  separate  in  order  to  get  a  detailed  analysis 
of  cost  in  each  department,  so  that  any  leaks  which  may  exist  will 
be  brought  .to  hght.  All  labor  done  in  a  department  is  part  of  the 
cost  of  operation  of  that  department  and  must  be  taken  up  in  the 
monthly  cost  sheets.  There  will  be  some  general  labor,  such  as  fore- 
men, superintendents,  etc.,  whose  work  must  be  distributed  over 
several  departments.  The  basis  for  this  distribution  depends  on  the 
nature  of  the  busiaess.  It  wiU  be  necessary  to  open  departmental 
labor  accounts  which  will  be  charged  with  all  labor  and  credited  with 
the  labor  cost  of  the  completed  material.  The  balance  in  these 
accounts  will  represent  the  value  of  labor  done  on  the  work  in  process. 

There  should  be  also  an  overhead  expense  account  for  each  depart- 
ment, and  these  accounts  will  be  charged  with  their  proportion  of  the 
fixed  charges,  with  all  indirect  material  or  suppHes,  and  with  aU  mis- 
cellaneous expense  items.  The  credit  to  these  accounts  wiU  be  the 
expense  incurred  on  the  work  completed,  and  the  balance  will  be  the 
expenses  incurred  on  the  work  in  process. 

At  the  end  of  the  month  a  journal  entry  is  made  charging  a  suc- 
ceeding department  material  account,  or  the  finished  goods  account, 
as  the  case  may  be,  with  the  total  cost  of  the  jDroduct  sent  out  and 
crediting  each  of  the  departmental  accounts  with  its  share  of  the 
total  cost.  When  this  is  done  it  wiU  be  seen  that  the  sum  of  the  bal- 
ances in  these  three  departmental  accounts^  namely,  material,  labor, 
and  expense,  wiU  be  the  cost  of  the  work  in  process  in  that  depart- 
ment. When  a  department  has  completed  all  the  work  it  has  and 
sent  its  product  to  some  other  department  these  three  accounts  should 
balance. 

In  some  lines  of  manufacture,  where  a  continuous  product  is  made, 
it  is  the  practice  to  issue  a  Works  Production  Order  to  make  a  certain 
quantity  of  goods,  and  where  this  practice  is  used  the  Job  Cost  Sys- 
tem is  used,  keeping  the  cost  by  order  number. 

After  the  goods .  have  reached  the  Finished  Goods  account  the 
method  of  treatment  under  the  Continuous  Production  System  is 
identical  with  the  Job  Cost  System. 


COST  SYSTEM   FOR  MANUFACTURERS. 


21 


FINANCIAL  AND  OPERATING  STATEMENTS. 

The  profit  and  loss  statement  should  be  so  arranged  as  to  reflect  the 
actual  results  of  the  period,  and  the  figures  sho^vn  thereon  should  not 
need  any  explanation  or  qualification. 

For  the  purpose  of  giving  the  executive  information  as  to  the  opera- 
tions of  his  factory  it  is  well  to  prepare  a  statement  of  factory  opera- 
tions. As  all  the  figures  are  from  the  books,  the  preparation  of  this 
statement  involves  very  little  work  and  gives  valuable  information. 

A  statement  of  assets  and  liabilities  should  also  bo  prepared,  and 
the  difference  between  assets  and  liabilities  must  be  the  figure  shown 
on  the  profit  and  loss  statement  as  surplus  or  net  profit. 

Wliere  goods  are  purchased  for  resale  the  profit  and  loss  statement 
should  have  another  division  showing  the  amount  of  profit  on  pur- 
chased goods  or  merchandising  separate  from  the  profit  earned  on 
manufactured  goods.  Where  this  item  is  small  it  may  bo  disregarded 
and  merged  into  manufactured  goods,  but  the  best  practice  is  to 
keep  them  separate. 

The  systems  outhned  are  bcheved  to  be  simple  and  easy  of  opera- 
tion. Wliile  a  number  of  details  have  been  explained  it  must  be 
remembered  that  the  methods  outhned  are  general,  and  it  is  not 
claimed  that  the  outhnes  as  given  would  fit  every  business.  The  one 
thing  above  aU  others  that  both  the  manufacturer  and  the  accountant 
should  have  in  mind  in  installing  a  system  is  simphcity.  Simplicity 
means  ease  of  operation,  less  liability  of  error,  and  what  is  equally 
important  economy  of  operation. 

LEDGER  ACCOUNTS  AND  STATEMENTS. 

The  following  schedules  show  the  ledger  accounts  necessary,  the 
trial  balance  before  the  closing  entries  are  made,  and  forms  for  a 
profit  and  loss  statement,  statement  of  factory  operations,  and 
balance  sheet.  In  order  to  enable  ready  reference  to  be  made  to  the 
various  entries  numbers  have  been  inserted  showing  the  source  of  the 
entry.  While  the  ledger  accounts  show  the  books  as  closed,  it  is  not 
recommended  that  this  be  done  except  at  the  end  of  the  fiscal  year, 
as  statements  can  be  prepared  from  the  ledger  without  the  accounts 
being  closed. 

MATERIALS.  1. 


Balance 

Purchases (29) 

Freight  iind  Express (29) 

J5alance 


$3,000 

7,800 

284 

00  ' 

00 

32 

11,084 

32 

4,600 

00  1 

Work  in  Process (11) 

Balance. 


$0, 4S4 
4,  COO 


22 


COST   SYSTEM   FOE   MANUFACTURERS. 
LABOR. 


Total  l^y  Roll. 
Balance 


.(29) 


;'   $5,692 
6S6 

28 
79 

6,379 

07 

i 

Balance 

Work  in  Process 

Building  Expense 

Power 

Repairs 

General  Factory  Expense. . . 
Factory  Overhead,  Dept.  A . 

"  "  "      B. 

"  "  "  C. 
Shipping 


.(14) 
..(3) 
..(4) 
..(8) 
-■(9) 
.(10) 
.(11) 
-(12) 
.(21) 


J200 
4,444 
185 
300 
.  356 
92 
246 
251 
185 
117 


6,379     0 


Balance. 


686  I  79 


BUILDING  EXPENSE. 


Labor (2) 

Power  ( Heat  and  Light) (4) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Repairs (8) 

Elevator  Expenses (29) 

Water (29) 

Miscellaneous  Materials (29) 


$185  00  1 

84  10  I 

12  !  00 

20  :  00 


28     00 


508  I  60 


General  Factory  Expense (9) 

Factory  Overhead,  Dept.  A... (10) 
'f  B...(U) 
"      C....(12) 

Shipping (21 ) 

General  Expense  (Office) (23) 


S76 

29 

101 

72 

127 

15 

101 

72 

50 

86 

50 

86 

508  1  60 

POWER. 


Labor (2) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Fuel (29) 

Oils (29) 

Water (29) 

Repairs  and  Supplies (29) 


$300  00 

8  00 

10  00 

40  00 
325  '  00 

45  00 

38  00 

75  00 


841     00 


Building  Expense 

Factory  Overhead,  Dept.  A . 

U  H  it         T> 


(3) 

$84 

10 

(10) 

252 

30 

(11) 

336 

40 

(12) 

168 

1 

20 

1     841 

00 

INSURANCE. 


Accounts  Parable. 


-(29) 


Balance. 


Building  Exi)ense (3) 

Power (4) 

Repairs , (8) 

Factory  Overhead,  Dept.  A .  ..(10) 

"  "  "      B...(ll) 

"     •         "      C....(12) 

Shipping (21) 

General  Expense (23) 

Balance 


$12 
8 
2 

12 
16 
7 
1 

14 
756 


00 


TAXES. 


Building  Expense (3) 

Power (4) 

Repairs (8) 

Factory  Overhead,  Dept.  A . .  .(10) 

"  "  "      B...(ll) 

"      C....(12) 

Shipping^ (21 ) 

General  Expense (23) 

Balance 


$20 
10 
2 
15 
20 
8 
1 
16 
1,000 


1,095     00 


COST   SYSTEM   FOE   MANUFACTUEERS. 
DEPRECIATION  RESERVE. 


23 


Balance. 


$1,568 

74 

1,568 

74 

Balance 

Building  Expense (3) 

Power (4) 

Repairs (8) 

Factory  Overhead  Dept.  A (10) 

"      B....(ll) 

"  "  "      C (12) 

Shipping (21 ) 

General  Expense (23) 

Balance 


SI, 240 

00 

40 

00 

40 

00 

13 

33 

75 

00 

100 

00 

43  1  75 

8  1  33 

8  1  33 

1,508  i  74 

1,568  1  74 


REPAIRS. 


Labor (2) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Supplies (29) 

Miscellaneous  Expense (29) 


$356 

2 

2 

13 

167 

48 


589 


Building  Expense (3) 

Factory  Overhead, Dept.  A . . .( 10) 

"       B...(ll) 

^^."  "  "       C...(12) 

Shipping (21) 


$65 

00 

159 

00 

247 

80 

115 

43 

2 

00 

589 

23 

GENERAL  FACTORY  EXPENSE. 


Labor (2) 

Building  Expense (3) 

Factory  Office  Expense (29) 

Miscellaneous  Expense (29) 

Miscellaneous  Supplies (29) 


$92 

00 

76 

29 

265 

00 

14 

10 

20 

00 

467 

99 

Factory  Overhead.  Dept.  A. .  .(10) 
"  B...(ll) 
"        C....(12) 


FACTORY  OVERHEAD,  DEPT.  A. 


Indirect  Labor (2) 

Building  Expense (3) 

Power (4) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Repairs (8) 

General  Factory  Expense (9) 

Miscellaneous  Supplies (29) 

"  Expense (29) 

Renerve  for  Overhead, {13) 


$246 

50 

101 

72 

252 

30 

12 

(K) 

15 

00 

75 

00 

159 

(K) 

155 

90 

30 

(X) 

75 

60 

84 

32 

1,207 

34 

Work  in  Process,  1,802  Hours,  at  67 
cents (14) 


$1,207 


1,207     34 


34 


FACTORY  OVERHEAD,  DEPT.  B. 


52- 

Work  in  Process,  2,523  Hours,  at  M» 

cents (14) 

Reserve  for  Overhead (iS) 


Indirect  Labor (2) 

Building  Expense (3) 

Power ( 4 ) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Repairs (8) 

General  Factory  Expense (9) 

Miscellaneous  Supplies (29) 

"  Expense (29) 


S251  1 

20  , 

127 

15 

336  ! 

40 

16  , 

(K)  : 

20  1 

00  j 

100  i 

(K) 

247  1 

80 

207 

79 

40 

00 

85 

40 
74 

1,431  1 

24 


COST   SYSTEM    FOR   MANUFACTURERS. 
FACTORY  OVERHEAD,  DEPT.  C. 


12. 


Indirect  Labor (2) 

Building  Expense (3) 

Power (4) 

Insurance (5) 

Taxes (6) 

Depreciation (7) 

Repairs (8) 

General  Factory  Exjiense (9) 

Miscellaneous  Supplies (29) 

"  Expense (29) 


$185 

70 

101 

72  1 

168 

20 

7 

00 

8 

lO 

43 

75 

115 

43 

104 

30 

20 

00 

61 

50    ' 

816 

35 

Work  in  Process,  4,418  Hours,  at  15 

cents (14) 

Reserve  for  Overhead (IS) 


S662 

153 

70 

65 

816 

35 

RESERVE  FOR  OVERHEAD. 


13. 


Factory  Overhead,  Dept.  B... (11)    I 
"      C...(12)    j 


$119 
153 


273 


78  , 
65  ! 


Factory  Overhead,  Dept.  A.  ..(10) 
Trading (SO) 


273 


43 


WORK  IN  PROCESS. 


Balance 

Material (1) 

Labor (2) 

Factory  Overhead,  Dept.  A . .  .(10) 
"  B...(ll) 
"     C...(12) 

Balance 

ace 

c  in  proct 
of  return; 

Balance 

Sales  returns (17) 

Sales  allowances (18) 

Out  freight (19) 

Trading (.20) 


$2,000 
6,484 
4,444 
1,207 
1,311 
662 


16,110 


4,024 


86 


FINISHED   GOODS. 


$12,086 
4,024 


16,110 


99 


83,754 

12,086 

597 

00 
13 
12 

Trading  (cost  of  sales) (20) 

!  Balance         

$8,801 
7,635 

53 

72 

Work  in  process (14) 

Cost  of  returns (20) 

1 

16,437 

25 

16,437 

25 

Balance 

7,635 

72 

SALES. 


13,485     00 


Accounts  receivable 


$13,485     60 


13,485     60 


SALES  RETURNS. 


Accounts  receivable (2.S) 


$805     20  I    Sales (/fi)  i         SS65  \  ?0 


SALES   ALLOWANCES. 


18. 


Accounts  receivable (28) 


$50     00      Saks (16)  \  UO  ]  00 


OUTBOUND  FREIGHT. 


Accounts  Payable. 


(29)    I  $120     00      Sales. 


.(16) 


$!S0     00 


COST   SYSTEM   FOR   MANUFACTUKEES. 
TRADING. 


2l» 


20. 


Cost  of  Sales (151 

Resen'e  for  Overhead (13) 

Profit  and  loss {27) 


$8,801 
189 

4,05e 


13, 047 


Cost  of  Returns (15) 

Sales (16) 


$597 
12,450 


13,047 


52 


SHIPPING. 


Labor 

Building  Expense 

Insurance 

Taxes 

Depreciation 

Repairs 

Miscellaneous  Supplies. 
Miscellaneous  Expense. 


..(2) 
.-(3) 
..(5) 
--(6) 
..(7) 
..(8) 
-(29) 
■(29) 


$117 

00 

50 

m 

1 

00 

1 

25 

8 

33 

2 

00 

50 

00 

6 

75 

237 

19 

Profit  and  loss. 


i237 

19    ■ 

1 

1 

237 

19  1 

1 

SELLING  EXPENSE. 


Salaries 

Commissions. 
Advertising.. 


.(29) 
.(29) 
-(29) 


200 
120 


1,120 


Profit  and  Loss . 


.(27) 


$1, 120 


1,120 


BS 


GENERAL  EXPENSE. 


23. 


Building  Expense 

Insurance 

Taxes 

Depreciation 

OfBcers'  Salaries 

Office  Salaries 

Delivery  Expense 

Miscellaneous  Expense. 


.-(3) 
.-(5) 
.-(6) 
--(7) 
-(29) 
■  (29) 
.(29) 
-(29) 


$50 

14 

10 

8 

400 

300 

180 

204 


1, 180     67 


Profit  and  Loss 


tl,  180 


1,180     07 


67 


DISCOUNT  ON  PURCHASES. 


Profit  and  Loss (27)  S!65     40      Accounts  Payable 


.(29) 


$105     40 


DISCOUNT  ON  SALES. 


Accounts  Receivable (28) 


5     00      Profit  and  Loss (27) 


25. 


$95     00 


RESERVE  FOR  BAD  DEBTS. 


Accounts  Receivable 

(2S) 

$64 
131 

00 
00 

Balance 

Profit  and  Loss  .                           (27) 

$125 

70 

?0 

m 

Balance 

195 

0() 

195  1  00  1 

1 

131 

00  il 

26 


COST   SYSTEM   FOR  MANUFACTUEEKS. 
PROFIT  AND  LOSS. 


Shipping (21) 

Seilmg (22) 

General  Expense (23) 

Discount  on  Sales (25) 

Reserve  for  Bad  Debts (26) 

Net  Profit  to  Surplus (36) 


$237 
1,120 
1,180 
95 
70 
1,S18 


4,222 


19 
53 

67 
00 
00 


28 


ACCOUJMTS  RECEIVABLE. 


2S. 


Balance. 
Sales 


Balance. 


-(16) 


$6,000 
13, 485 


19,485 


8,536 


60 


Cash (30) 

Returns (17) 

Sales  Allowances (18) 

Discount  on  Sales (25) 

Bad  Debts (26) 

Balance 


$9,875 

00 

865 

20 

50 

00 

95 

00 

64 

<X) 

8,536 

40 

19, 485 

60 

ACCOUNTS  PAYABLE. 


Cash 

....(30) 
....(24) 

i     $15,350 

165 

10, 233 

50 
40 

81 

Balance 

S6,2.50     00 
19,499     71 

Discount  on  Purchases 

Accounts  Payable  Register 

Balance 

25,749     71  1 

25, 749     71 

1 

10,233     81 

CASH. 


30. 


Balance 

Accounts  Receivable (28) 

817,061 
9,875 

00      Accounts  Payable (29)        $15,350 

00      Balance '      11, .585 

50 
50 

26,936 

00                                                                         ;     20,936     1  00  1 

Balance ; 

11,585 

50  1                                                                     ll 

-| 

LAND. 


Balance. 


$4,000  I  00 


BUILDINGS. 


32. 


Balance $12,000     00 


MACHINERY  AND   EQUIPMENT. 


33. 


Bf>,lance $.">0,000  |  00 


COST  SYSTEM   FOR  MANUFACTURERS. 
CAPITAL   STOCK. 


27 


Balance. 


$100,000 


UNISSUED   STOCK. 


Balance. 


$15,000     00 


SURPLUS. 


36. 


Balance 

$6,518 

89 

Balance -           1 

$5,000 
1,518 

00 

89 

(21\ 

Balance 

6, 518 

89 

6,518 

89 

6,518 

89 

TRIAL  BALANCE  (BEFORE  CLOSING)  JANUARY  31,  1916. 


Materials. 
Labor. 


Insurance 

Taxes 

Depreciation  Reserve 

Factory  Overhead  Dept.  A. 

"  "  "      B. 

"  "  "      C. 

Work  in  Process 

Finished  Goods 

Sales 


Sales  Returns 

Sales  Allowances. . . 
Outbound  Freight. 
Trading. 


Shipping 

Selling  E.xpense 

General  Expense 

Discount  on  Purchases. 

Discount  on  Sales 

Reserve  for  Bad  Debts. 
Accounts  Receivable. .  - 

Accounts  Payable 

Cash. 


Land 

Buildings 

Machinery  and  Equipment. 

Capital  Stock 

Unissued  Stock 

Surplus 


$4,600 


756 
1,000 


00 


119 
153 

4,024 
7,635 


120 
8,204 

237 
1,120 
1,180 


95 


8,536 


11,585 

4,000 

12,000 

50,000 


15,000 


131, 285 


865  !  20 
50  i  00 


00 


8686 


1,568 
84 


13, 435 


61 
10,233 


100,000 
5,000 


I     131,285  I  66 


28  COST   SYSTEM    FOR   MANUFACTUEEES. 

PROFIT  AND  LOSS  STATEMENT  FOR  MONTH  ENDING  JANUARY  31,  1916. 

Gross  Sales (16)  $13, 485. 60 

Sales  Returns (17)      ?865.  20 

Sales  Allowances (18)  50. 00 

Outbound  FTeight (19)        120. 00 

1,035.20 


Net  Sales 12,  450. 40 

Cost  of  Sales (20)    8,  204. 41 

Reserve  for  Overhead (13)        189. 11 

8,  393. 52 


Gross  Profit 4,  056. 88 

Shipping (21)        237.19 

Selling  Expense (22)     1, 120.  53 

General  Expense (23)    1, 180.  67 

Discount  on  Sales (25)  95.  00 

Bad  Debts (20)  70. 00 

—■ 2,  703. 39 


Net  Earnings 1,  353. 49 

Discount  on  Purchases (24)  165. 40 


Xet  Profit 1,  518.  89 

STATEMENT  OF  FACTORY  OPERATIONS,  FOR  THE  MONTH   ENDED  JANUARY  31.   1916. 

SIMMAKY    OF   FACTORY   OPEUATIOXS. 

Material: 

Inventory  at  first  of  Month ?3,  000. 00 

Purchases 7,  800. 00 

Freight  and  Express  In 284.  32 


Total 11,  084.  32 

Less  Inventory  at  End  of  Month 4,  600. 00 


Direct  Material  Used $6,484.32 

Direct  Labor 4,  444.  67 

Factory  Overhead,  per  detail  below : 

Department  A 1,  207.  34 

B 1,311.96 

C 662.70 


Total  Factory  Overhead 3, 182. 00 

Total  Material  Labor  and  Overhead I 14,110.99 

Add  Inventory,  First  of  Month: 

Work  in  Process 2,  000.00 

Finished  Goods 3,  754. 00 

5, 754.00 


19,864.99 
Less  Inventory  at  End  of  Mouth: 

Work  in  Process 4,  024.  86 

Finished  Goods 7,  635.  72 

— ■ — 11.660.r8 


Cost  (J  Sales,  per  rroHt  and  Loss  Statement 8,  204. 41 


COST    SYSTEM    FOR   MANUFACTURERS. 
SUMMARY  OF  FACTORY  OVERHEAD. 


29 


Nature  of  Exixinse. 


Building  Expense. 

Power 

Depreciation 

Insurance 

Taxes. 


Shop  Repairs 

General  Factory  Expense. 

Miscellaneous  Supplie:; 

Indirect  Labor 

Miscellaneous  Expense 


Total 

Adjustment  in  Department  Overhead. 


Total  Factory  Overhead,  as  above . 


Total 

Depart- 

Depart- 

Depart- 

ment A. 

ment  B. 

ment  C. 

1 

$330 

69 

$101 

72 

$127 

15 

$101 

72 

758 

90 

252 

30 

336 

40 

168 

20 

218 

75 

75 

00 

100 

00 

43 

75 

35 

00 

12 

00 

16 

00 

7 

00 

43 

75 

15 

00 

20 

00 

8 

10 

522 

23 

159 

00 

247 

80 

115 

43 

467 

99 

155 

90 

207 

79 

104 

30 

90 

00 

30 

00 

40 

00 

20 

00 

683 

40 

246 

50 

251 

20 

1        185 

70 

222 

50 

75 

60 

85 

40 

1          61 

50 

3,371 

11 

1,123 

02  U     1,431 

74 

Sl^i 

35 

189 

11 

84 

32 

119 

78 

153 

65 

3,182 

00 

1,207 

34 

1,311 

96 

662 

70 

BALANCE  SHEET,  JANUARY  31,  1916. 

Current  Assets: 

Ca^h (30)  $11,  585.  50 

Accounts  Receivable (28)  $8,  536.  40 

Less  ReserA-e  for  Bad  Debts (26)  131.  00 

8,  405.  40 

Raw  Materials (1) 4,  600.  00 

Work  in  Process (14)   4,  024.  86 

Finished  Goods (15)   7,635.72 


Total  Current  Assets $36,  251.  48 

Deferred  Assets: 

Prepaid  Insurance (5)   756.  00 

PrepaidTaxes (6)   1,000.75 


Total  Deferred  Assets 

Capital  Assets: 

'Land (31)   4,000.00 

Buildings (32)       12,000.00 

Machinery  and  Equipment (33)       50,  000.  00 


1,  756.  75 


Less  Depreciation  Reserve (7) 


62,  000.  00 
1,  568.  74 


60,  431.  26 


Total  Capital  Assets 64,  431.  26 

Total  Assets 102,  439.  49 


Current  Liabilities: 

Accounts  Payable (29)   . 

Accrued  Wages (2)   . 


10.  233.  81 
686.  79 


Total  Current  Liabilities 10,  920.  60 

Capital  Liabilities: 

Capital  Stock (34)     100,  000.  CO 

Less  Unissued  Stock (35)       1 5.  000.  00 

—     85.  000.  00 

Surplus (36)   5,  000.  00 

Total  Capital  Lia]>ilities 90.  000.  00 

Net  Profit  for  Month 1,  51S.  89 


102,  439.  49 


30  COST   SYSTEM   FOR   MANUFACTURERS. 

USES  AND  ADVANTAGES  OF  A  COST  SYSTEM. 

The  prime  object  of  a  cost  system  is  to  determine  costs,  to  analyze 

and  compare  them,  and  to  use  them  as  a  basis  for  making  prices.    But 

the  uses  and  advantages  go  further.     A  manufacturer  from  rehable 

records  is  able  to  make  clearer  and  more  intelligent  statements  to  his 

bank  and  thereby  obtain  a  larger  line  of  credit  than  he  could  without 

them. 

BETTER  DIRECTION  OF  SALES  FORCE. 

In  most  every  hne  of  manufacture  there  are  some  classes  of  work 
done  on  which  the  manufacturer  loses  money.  This  may  be  due  to 
the  high  cost  in  his  own  plant,  or  it  may  be  due  to  the  fact  that  some 
competitor  is  better  equipped  to  make  that  particular  article.  A  cost 
system  will  bring  out  these  facts  and  wiU  show  the  manufacturer 
which  lines  he  should  push.  Salesmen,  like  everyone  else,  are  prone 
to  follow  the  line  of  least  resistance.  In  salesmanship,  the  line  of 
least  resistance  is  selling  the  goods  which  require  the  least  effort,  and 
in  nearly  every  instance  the  goods  which  require  the  least  effort  to 
sell  are  the  least  profitable  lines.  If  the  selling  force  know  that  a 
line  of  goods  produces  little  or  no  profit  and  are  told  to  use  every 
effort  to  push  another  line,  the  result  will  be  apparent  in  the  profit  and 
loss  account. 

StQl  other  manufacturers  have  customer  on  their  books  to  whom 
they  have  been  selling  for  years  and  have  been  giving  some  reduction 
in  price  or  some  concession  in  the  way  of  extra  work.  A  number, of 
these  accounts  are  decidedly  unprofitable,  and  a  cost  system  will 
bring  these  to  light  and  put  the  manufacturer  either  in  a  position  to 
raise  his  prices  to  a  profitable  basis  or  let  some  one  else  have  the 
unprofitable  business. 

ELIMINATION  OF  WASTE. 

In  every  manufacturing  business  there  are  bound  to  occur  leaks, 
either  of  material,  lal)or,  or  expense.  If  statistics  are  kept  showing 
the  amount  of  material  necessary  to  do  certain  classes  of  work,  the 
amount  of  labor,  and  the  amount  of  overhead  expense,  an  increase 
in  any  of  these  items  will  be  revealed  by  a  comparison  and  the  execu- 
tive will  be  in  a  position  to  take  the  matter  up  for  investigation.  It 
is  liardly  necessary  to  say  that  after  a  few  of  these  matters  have  been 
taken  up  with  the  factory  the  factory  people  M'ill  use  a  little  more 
care,  not  only  in  the  use  of  the  material  but  in  the  time  they  spend 
on  the  work.  A  cost  system  with  forms  properly  designed  for  giving 
statistical  information  is  of  the  greatest  aid  to  factory  efficiency. 


COST   SYSTEM   FOR   MANUFACTURERS.  31 

COST  SYSTEM  AN  INVESTMENT,  NOT  AN  EXPENSE. 

A  system  will  not  run  itself;  neither  will  it  in  itself  reduce  costs 
nor  increase  efficiency.  This  is  strictly  up  to  the  manufacturer  him- 
self. A  system  will  give  him  the  information,  and  if  this  information 
is  properly  used,  he  will  unquestionably  find  that  his  system  is  not 
an  item  of  expense,  but  a  very  valuable  asset. 

If  a  manufacturer  purchases  a  new  machine  before  his  old  one  is 
worn  out,  he  does  so  because  he  expects  the  amount  expended  to 
increase  his  profits  either  from  economy  in  operation  or  from  an  in- 
crease in  production.  He  looks  on  this  as  an  investment  and  not  an 
expense.  Office  methods  have  been  improved  to  quite  as  large  an 
extent  as  machinery,  and  an  investment  in  improved  methods  wiLL 
produce  a  return  just  as  will  an  investment  in  improved  machmery. 

One  of  the  strongest  arguments  in  favor  of  installing  a  practical 
cost  system  is  the  fact  that  every  manufacturer  who  has  installed  one 
and  who  has  operated  it  for  at  least  a  year  is  firmly  convmced  that  it  is 
a  paying  proposition. 

Tlie  Federal  Trade  Commission  is  urging  manufacturers  to  give  the 
subject  of  accurate  costs  the  attention  it  deserves.  It  has  found  that 
unreliable  costs  of  production  and  distribution  cause  a  great  deal  of 
unfair  competition  and  a  heavy  business  death  rate. 

Wliile  the  claim  is  not  made  that  a  cost  sj^stem  wOl  save  a  man  from 
failure,  the  claim  is  made  that  a  man  who  knows  where  he  stands  day 
by  day  is  very  much  loss  likely  to  make  a  failure  of  his  business  than 
one  who  is  directing  his  business  by  guesswork. 

o 


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A    001  293  330    5 


